Millions of people will be hit by higher taxes despite the Chancellor’s claim that her Budget would help “working people”.
Income tax thresholds in England will be frozen until the end of the 2030-31 financial year, dragging more people into higher tax bands.
This is a three-year extension to the existing freeze that began in 2021, a year longer than predicted, and will raise more than £8 billion in tax revenue.
The personal allowance freeze will apply in Scotland, but the other income tax threshold freezes announced today will not, and Holyrood will set these for Scotland in January. It means the Finance Secretary will either have to follow suit or cut spending.
The Office for Budget Responsibility estimates that 780,000 more people will be brought into paying income tax in 2029-30, largely as a result of the extensions to the freezes in England.
How the tax changes affect Scotland
Jason Hollands, managing director at wealth management firm Evelyn Partners, said: “This is a massive income tax rise by stealth. The power of this policy to increase the income tax and National Insurance burden over the years is really quite eye-watering.
“At the start of the century, only one in ten taxpayers were subject to higher rate tax.
“However, we are now in a position where a fifth of taxpayers are paying the two highest rates of tax, which makes a mockery of the idea that these quite onerous marginal rates should be reserved for the nation’s “high earners”.
“The numbers exposed to the highest rates of tax will soar to nearly a quarter by 2030.”
He added: “While the Chancellor can try to argue otherwise, this is very much an increase in income tax on working people across all income levels, as millions more will be drawn into paying income tax at both the basic rate and the higher bands.
“But as people won’t see an immediate change in their take-home pay and the tax burden just builds over time it is the very definition of a stealth tax.
“Higher rate tax, once the preserve of the wealthy, is going to be the default rate of middle-income salaried roles, most of whom don’t feel comfortably off, never-mind affluent.”
Nigel Green, chief executive of financial advisory firm deVere, said the income tax decision means workers will be “locked into relentless fiscal drag and pulls more income into higher bands year after year.”
He said that for advisers working with internationally-mobile clients, the trajectory is unmistakable and “is precisely the type of structural change that triggers relocation planning”.
He added: “People who generate significant economic activity can relocate easily. They analyse long-term patterns, not political slogans.
“The consequences extend far beyond high earners. When wealth leaves, investment follows.”
Andrew Tully, technical services director at Nucleus said: “This deep freeze to income tax thresholds is a stealth tax which means many millions of people will be dragged into paying income tax for the first time or become higher rate taxpayers.
“More than one million of the lowest earners or pensioners will start paying income tax for the first time. While around 800,000 more will be dragged into higher rate tax. Others will be pulled into additional rate tax or enter the effective 60% band between £100,000 and £125,140 where the personal allowance is removed.
“These changes may make some people reconsider the number of hours they work or potentially decline promotions as the financial benefits after tax may not be significant.”
Sandy Begbie, chief executive of Scottish Financial Enterprise, said: “Unfortunately, this tax and spend budget makes economic growth less – rather than more – likely across Scotland and the UK.”
Marc Crothall, chief executive of the Scottish Tourism Alliance, said: “The sector needed a Budget that reduced the cost of employment, strengthened consumer confidence and supported recovery. Instead, today’s measures risk making an already difficult outlook even more precarious.”
Tory leader Kemi Badenoch described the budget at “the nightmare before Christmas” that “nobody voted for” and said the Chancellor should resign.
Other key announcements
From 6 April 2027, the maximum subscription to a cash ISA will be cut to £12,000 a year from £20,000. However, over 65s will retain the full cash allowance. For those who pay into a combination of cash and stocks & shares ISAs the change will mean at least £8,000 must be invested in stocks and shares.
The government will consult on reforming the Lifetime ISA and the implementation of a replacement ISA product for first-time buyers.
It will introduce “permanently” lower business rates for more than 750,000 retail, hospitality and leisure properties in England. Scottish operators will hope the Scottish government follows suit.
The move in England will be funded through higher rates on properties worth £500,000 or more, such as warehouses used by online retail giants, which already exists in Scotland.
Household gas and electricity costs will be lowered by £150 through cuts to green levies on energy bills.
Fuel duty will be frozen at its current rate until September 2026.
There will be a new mileage-based charge on electric and plug-in hybrid cars from April 2028 at around half the fuel duty rate paid by drivers of petrol cars (raising £1.4bn).
In 2028-29, the charge will equal 3p per mile for battery electric cars and 1.5p per mile for plug-in hybrid cars, with the rate per mile increasing annually with CPI.
There will be a new tax on houses worth more than £2m in England, raising £400m.
The two-child benefit cap has been removed, at a cost of £3bn by 2029-30. This will also save the Scottish Government around £150m, as it will no longer need to fund its proposed mitigation from devolved budgets.
Salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from National Insurance from April 2029.
Taxes on remote gaming will rise from 21% to 40% while duty on online betting is increasing from 15% to 25%. For horse racing and in-person gambling there is no change. Bingo Duty is also being entirely abolished from April 2026.
The Scottish Government will receive £820 million through the Barnett Formula.
The Office for Budget Responsibility’s report on the Budget, which was leaked before the Chancellor spoke, said: “GDP is forecast to grow by 1.5% on average over the forecast, 0.3 percentage points slower than we projected in March.”
It expects inflation to reach 3.5% for this year – that’s slightly higher than the forecaster estimated in March when it predicted a 3.2%. It has also lifted next year’s forecast from 2.1% to 2.5%. The OBR maintains its 2% estimate for 2027 and the following two years.
Market response
Following the accidental release of the OBR document the yield on the benchmark 10-year gilt fell around 0.07 percentage points – a substantial move – as investors responded positively to the data in the document.
However, shortly after midday, yields were higher than they were before the document emerged, suggesting the outlook was worse than they expected.
Equity investors were supportive of the broad fiscal package and the FTSE 100 closed 82.05 points higher at 9,691.58. The London market had been volatile in the run-up to the speech over fears of taxes on banks, gambling companies, airlines and the wider housing market.
The biggest gainer in the FTSE 100, was wealth manager St. James’s Place, up 4.64%, lifted by stronger sentiment towards the financial sector, which also boosted listed banks.
Shares in Entain, a major player in the online gambling industry, fell sharply initially, but then recovered.
Airlines were another targeted sector in the budget, with air passenger duties being updated in line with the Retail Prices Index from April 2027. The government also confirmed last year’s announcement of a higher rate of passenger duty for private jets.
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